OECD warns on difficulties with tax avoidance plan

Getting governments to agree on how to combat multinational tax avoidance will be "a major challenge”, the Organisation for Economic Co-operation and Development’s tax chief has warned.

Getting just such an agreement was one of the major goals outlined by Prime Minister Tony Abbott in Davos last week for the G20 summit in October, which Australia will lead.

The director of the OECD’s centre for tax policy, Pascal Saint-Amans, told The Australian Financial Review it will be hard to get agreement on how to implement changes aimed at ensuring companies such as Google and Apple pay a fair share of tax on profits.

"Reaching consensus between China, the United States, Australia, France, Mexico, South Africa and some others is a major challenge,” he said in an interview.

"They all agree there is non-taxation – that’s for sure. But do they agree on how to fix it?

”Treasurer Joe Hockey, who will work closely with Mr Abbott, downplayed the difficulty of a deal.

A spokeswoman said the G20 was "strongly committed to international co-operation to protect the integrity of national tax systems”.

Mr Saint-Amans said one of the areas governments "might not necessarily agree on, is how do you share the tax, once it’s re-established, between source and residence?”. Tax advisers warn that some governments, for example the US, may come under pressure to resist changes that could result in companies shifting offshore.

Developed countries have agreed to work together to combat "base erosion and profit shifting”.

‘Double non-taxation

’While Mr Saint-Amans is confident countries will sign up to the OECD’s final plan, due in September, implementation will be more difficult.

The goal is to eliminate "double non-taxation” among multinationals.

This problem was highlighted last year during a US Senate hearing into the tax affairs of Apple, which had routed billions of dollars in profits through Irish companies to entities in Bermuda.

Mr Saint-Amans said while schemes taking advantage of tax havens would be eliminated, companies could still channel profits into low-tax jurisdictions such as Ireland and Singapore.

"What we are currently worried about is that the profit is in locations where nothing is located,” he said. ""There’s no value creation or activity from the profits. We’re trying to crack down on the schemes using the tax havens.

"Assuming you have the value creation in the jurisdictions with low rates, well yeah, that may be something that happens,” he said.

But he singled out digital players such as Google, saying they had been more aggressive than the others in avoiding tax. The global fight would be aimed at all multinationals, but "the issue is exacerbated with [Google],” he said. "It’s not a difference in nature, but a difference in degree.”

Asked if there had been an unfair focus on high-tech companies like Google, Mr Saint-Amans said he did not think so. Google started the debate on this issue, he said, by claiming not to have a "permanent establishment”.

The OECD is examining how tax authorities can rework the old concept of permanent establishment, which imposes tax based on where a company has a physical presence, for the digital economy.

"You [Google] said you have no [physical] presence, but actually you do,” Mr Saint-Amans said.

"Governments, including Australia, are finding there are permanent establishments. You can’t do massive advertisements in a country without contacting the advertisers. If you want to contact advertisers you go, you see, you contract with them.

"By being overly aggressive and pretending there was no permanent establishment, they’ve actually managed to put in the government’s mind that there is an issue and that we need to invent a new contract.” He said if there had been a permanent establishment, "the value attributed to them is very limited” and this had led to them paying less tax.

Treasury calls for new rules

Australian Treasury has previously said tax treaties cannot overcome the fundamental issues that arise from operating in a digital economy, and suggested new rules are needed.

Mr Saint-Amans also hit back at accusations that the OECD’s plan is obviously ambitious and within too tight a time frame. "If we didn’t act quickly all governments would start taking unilateral measures and we won’t have consensus,” he said.

While the timing was a challenge, it was also curious that the business community was asking the OECD to take more time on consultation, when global chief executives themselves knew the importance of moving fast. "I am worried when business people tell us ‘two years is too fast’,” he said. "When a CEO is asked to do something, do they say, ‘you have five years to do it’?”

Mr Saint-Amans joined the OECD in September 2007 and he has played a key role in the advancing the OECD’s tax agenda among G20 governments. Prior to this he was an official in the French Ministry for Finance for nearly a decade.

Mr Saint-Amans warned governments against taking unilateral action before the OECD’s final recommendations in September.

Countries such as Israel and Italy are imposing unilateral rules such as royalties on search engine companies.

Mr Saint-Amans said it was up to tax administrators what tools they used, but he didn’t want to see governments acting in isolation.

Mr Saint-Amans said the OECD was trying to move fast. "I’m really sympathetic with governments taking measures to protect their tax base, but at the same time I’m worried because one condition for the success of this project is to be able to bring more certainty for business . . . and therefore avoid ­unilateral measures.”

Mr Saint-Amans said the OECD plan was not able to address issues of tax competitiveness, when countries such as Singapore had a lower corporate tax rate of 17 per cent, and Ireland’s rate was 12.5 per cent. Currently the United States and Australia have higher corporate tax rates than these countries. The rate in America is 35 per cent, and in Australia it’s 30 per cent (with a promise to drop to 29.5 per cent).

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